Index January 23, 2014 MANITOBA HYDRO 2015/16 & 2016/17 GENERAL RATE APPLICATION

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1 0 0 0 Tab Index January, 0 MANITOBA HYDRO 0/ & 0/ GENERAL RATE APPLICATION FINANCIAL RESULTS & FORECASTS INDEX.0 Overview.... Summary of Financial Results & Forecast.... General Consumers Revenue.... Extraprovincial Revenue.... Other Revenue.... Operating, Maintenance & Administrative.... Finance Expense.... Depreciation & Amortization.... Water Rentals & Assessments Fuel & Power Purchased....0 Capital & Other Taxes.... Corporate Allocation.... Other Expenses.... Non-Controlling Interest.... Cost Saving Intiatives..... Reduction of Operational Positions..... Consolidation of Rural District Offices..... Managing Contractor Costs in Various Projects..... Review of the Gillam Redevelopment and Expansion Project (GREP)..... Pointe du Bois Operations Spillway Cost Efficiencies..... Implementation of Mobile Workforce Management..... Asset Management Strategies..... Technology Modernization Initiative for Better Capital Investment Decisions Supply Change Management Initiatives Records Centre Transition to Iron Mountain..... Outage Management System...

2 Appendices. Manitoba Hydro-Electric Board Annual Report Year Ended March, 0. Manitoba Hydro-Electric Board Quarterly Report Ended June 0, 0. Manitoba Hydro-Electric Board Quarterly Report Ended September 0, 0. International Financial Reporting Standards Status Update Report. Operating, Maintenance, & Administrative Expense. Depreciation Rates & Depreciation Study. Net Impact of Accounting Policy & Estimate Changes

3 Tab Page of January, MANITOBA HYDRO 0/ & 0/ GENERAL RATE APPLICATION FINANCIAL RESULTS & FORECASTS.0 OVERVIEW Tab provides explanations of the actual and forecast revenues and expenses related to Manitoba Hydro s Electric operations for 0/ to 0/, and outlines the significant year over year changes. Section. provides a summary of Manitoba Hydro s financial results and forecasts for 0/ to 0/, and Sections. to. discuss the revenue and cost components for 0/ to 0/. Section. outlines a number of initiatives that Manitoba Hydro is undertaking to reduce costs and ease pressures on financial results and rates. The key conclusions with respect to Tab are:. The requirement for the proposed rate increases are primarily being driven by the increased finance expense, depreciation and amortization expense and capital taxes associated with investment in new assets and reinvestment in existing assets.. Manitoba Hydro is committed to effectively controlling its OM&A costs and has recently completed an extensive review of its staff compliment and is undertaking a number of initiatives across the Business Unit s to maintain OM&A cost increases at %, which is below inflationary levels (excluding accounting changes that impact OM&A).. While there are a number of prospective accounting changes being made for financial reporting purposes between 0/ and 0/ that will increase OM&A and decrease Depreciation and Amortization, these changes offset each other and are not driving the need for rate increases.

4 Tab Page of January, 0. SUMMARY OF FINANCIAL RESULTS & FORECAST Figure. provides a summary of actual and forecast net income for electric operations (excluding subsidiary operations) for 0/ to 0/. For 0/ and 0/, the red bars show Manitoba Hydro s net income/loss without the proposed rate increases and the green bars show the projected net income including the proposed rate increases. Figure. Net income

5 Tab Page of January, 0 The following schedule provides a breakdown of the Statement of Income. MANITOBA HYDRO Schedule..0 STATEMENT OF INCOME (000's) 0/ 0/ 0/ 0/ 0/ Actual Actual Forecast Forecast Forecast Revenue General Consumers 0 0 Bipole III Reserve - ( ) ( ) ( 0) ( ) Extraprovincial 0 Other 0 Total Revenue Excluding rate increases $ $ $ 0 0 $ 0 0 $ 0 Expenses Operating, Maintenance and Administrative 0 0 Finance Expense Depreciation and Amortization Water Rentals and Assessments Fuel and Power Purchased 0 0 Capital and Other Taxes Corporate Allocation 0 0 Other Expenses 0 0 Total Expenses 0 0 Non-controlling Interest* Net Income before rate increases $ 0 $ $ 0 $ 0 $ ( ) Proposed Rate Increases (.% April, 0 &.% April, 0) Net income including rate increases $ 0 $ $ 0 $ $ Year over year $ change $ 0 $ ( ) $ 00 $ ( ) 0 *Non-controlling interest represents NCN s share of the net income/loss from WPLP. 0/ Actual vs. 0/ Actual Net income from Electric operations increased in 0/ primarily as a result of higher extraprovincial revenue mainly due to increased generation from stations on the Nelson River due to higher flows, as well as higher general consumers revenue mainly due to colder winter weather, a rate increase and customer growth. The increase in revenue was partially offset by an increase in fuel and power purchased primarily due to higher purchased volumes from the colder winter weather, an increase in depreciation and amortization expense attributable to new additions to plant and equipment coming into service, and an increase in operating, maintenance and

6 Tab Page of January, administrative expense (OM&A) primarily due to higher pension and benefit costs related to changes in discount and mortality rates and greater employer contributions. 0/ Forecast vs. 0/ Actual Net income from Electric operations is forecast to decrease in 0/ primarily as a result of lower extraprovincial revenue from lower US sales volumes largely due to transmission outages that restricted exports on the US transmission line during October and November 0 and an increase in finance expense due to higher net interest on debt as assets go in-service and lower realized gains on the sinking fund and U.S. debt. These reductions to net income are partially offset by lower fuel and power purchased primarily due to lower purchased volumes due to the assumption of normal winter weather and a year-over-year projected increase in hydraulic generation during the winter period. 0/ Forecast vs. 0/ Forecast Net income from Electric operations is forecast to increase in 0/ primarily as a result of an increase in general consumers revenue mainly due to the proposed.% rate increase effective April, 0, as well as an increase in extraprovincial revenue mainly due to higher export prices. The increase in revenue is partially offset by an increase in finance expense primarily due to new long term debt issues to finance the Corporation s capital investment requirements, as well as interest rates that are projected to rise to more normalized levels, and increases in depreciation expense as a result of plant assets going into service. The net impact of accounting policy changes as a result of the transition to IFRS results in an overall reduction to net income. Please see Appendix. for additional information on the impact of accounting policy and estimate changes. 0/ Forecast vs. 0/ Forecast Net income from Electric operations is forecast to decrease in 0/ primarily as a result of increases in the volumes of US off-peak purchases and increased thermal costs due to the assumption of average water flows in 0/ compared to median water flows in 0/, an increase in finance expense primarily due to higher debt levels to finance the Corporation s capital investment requirements as well as interest rates that are

7 Tab Page of January, 0 0 projected to rise to more normalized levels and an increase in depreciation and amortization as well as capital taxes primarily due to increased plant investment. These reductions to net income are partially offset by an increase in general consumers revenue mainly due to the proposed.% rate increase effective April, 0, as well as an increase in extraprovincial revenue mainly due to a projected increase in export prices for Dependable and Opportunity Sales in 0/. The following sections review each component of the Statement of Income. A description of each component, the year over year changes explanation and the detailed schedule is provided.

8 Tab Page of January, 0 0. GENERAL CONSUMERS REVENUE General consumers revenue ( GCR ) is comprised of electricity sales to Manitoba Hydro s domestic customers as well as late payment charges. Customers are aggregated in two major rate classes Residential and General Service (Commercial and Industrial customers and Area and Roadway Lighting). For 0/ and 0/, the blue bar in Figure. shows the GCR generated from existing rates and the green bar shows the additional revenues generated from the proposed rate increases. Figure. General Consumers Revenue

9 Tab Page of January, 0 The following schedule provides a breakdown of GCR. MANITOBA HYDRO Schedule.. GENERAL CONSUMERS REVENUE (000's) 0/ 0/ 0/ 0/ 0/ Actual Actual Forecast Forecast Forecast Residential $ $ $ $ 0 0 $ General Service 0 0 Bipole III Reserve Account ( ) ( ) ( 0) ( ) Total Revenue excluding rate increases Additional General Consumers Revenue* Total Revenue including rate increases $ 0 $ 0 0 $ 0 $ 0 $ Year over year $ change $ 0 $ $ 0 $ 0 Year over year % change.% 0.%.%.% 0 0 * Additional General Consumers Revenue - 0/ and 0/ reflect rate increases of.% The Residential class is comprised of all housing types (single detached, duplexes, triplexes, etc.) and also includes individual metered apartment blocks, seasonal cottages and farm residences. The General Service ( GS ) class is comprised of commercial and industrial customers in the General Service Small, Medium and Large rate categories as well as Area and Roadway Lighting. Customers are classed as a GS Small if their connected load is less than 00 kv.a and their transformation is owned by Manitoba Hydro. Customers classed as GS Medium have connected loads which exceed 00 kv.a and whose transformation is also owned by Manitoba Hydro. GS Large customers have loads which typically exceed 000 kv.a and who own their own transformation. The GS Large class is further divided into three sub-classes based on the voltage used to serve the customer (0V-0 kv, 0 kv-00 kv and >00 kv). The Area and Roadway Lighting class is comprised of all street lights and sentinel lights which may be publically or privately owned or rented. The following sections highlight the year over year changes from 0/ through 0/: 0/ Actual vs. 0/ Actual The 0/ increase is primarily due to higher consumption from colder winter weather, a rate increase, as well as customer growth. The PUB approved a rate increase of.% effective May, 0. The PUB directed that.0% of the.% increase be included in

10 Tab Page of January, general revenue and that.% be set aside to mitigate rate increases when Bipole III is placed into service. 0/ Forecast vs. 0/ Actual The forecast 0/ increase is primarily due to the.% rate increase approved by the PUB on an interim basis effective May, 0. The PUB directed that.0% of the.% increase be included in general revenue and 0.% be set aside to mitigate rate increases when Bipole III is placed into service. The revenue increase is partially offset by the assumption of normal weather conditions for 0/. 0/ Forecast vs. 0/ Forecast The forecast 0/ increase is primarily due to the additional revenue associated with the proposed.% rate increase effective April, 0 as well as a.0% increase in energy consumption primarily due to growth in the Residential and General Service Large sectors. 0/ Forecast vs. 0/ Forecast The forecast 0/ increase is primarily due to the additional revenue associated with the proposed.% rate increase effective April, 0 as well as load growth in the Residential sector. These increases are partially offset by a reduction in load in the General Service sector due to a Top Consumer phasing out a significant portion of their operation.

11 Tab Page of January, 0 0. EXTRAPROVINCIAL REVENUE Extraprovincial Revenue includes revenues from Canadian and US export sales as well as revenues from other associated export market activities such as merchant sales, transmission credits and renewable energy certificates. Forecast Extraprovincial Revenues for 0/ are based on current storage conditions and expected inflows, assuming normal precipitation conditions for the remainder of the fiscal year. Revenues for 0/ are based on storage conditions carried forward from the prior fiscal year and median inflows. For the subsequent years, the projections are determined by averaging the revenues using the full range of experienced flow conditions. Figure. Extraprovincial Revenue

12 Tab Page 0 of January, 0 Please see the following schedule for a breakdown of Extraprovincial Revenue. MANITOBA HYDRO Schedule.. EXTRAPROVINCIAL REVENUE (000's) 0/ 0/ 0/ 0/ 0/ Actual Actual Forecast Forecast Forecast Canadian Sales 0 0 Other Sales (0) () - - Canadian 0 0 US Sales Other Sales Transmission Credits Renewable Energy Certificates 0 US Merchant (IESO & MISO)* 0 - Total Extraprovincial Revenue $ $ $ 0 $ $ 0 Year over year $ change $ $ (0 0) $ $ Year over year % change.% -.%.%.% *IESO = Independent Electricity Systems Operator and MISO = Midcontinent Independent System Operator Please see the following for a description of Extraprovincial Revenue components: Canadian and US Sales include both Dependable and Opportunity Sales. Dependable sales are export contracts sourced from Manitoba Hydro s dependable energy resources. Dependable energy resources are energy supplies assumed to be available in the event that the lowest recorded water supply conditions are repeated. Dependable sales involve capacity and energy commitments, are negotiated at least one year in advance of delivery, and have duration of greater than six months. Sales not identified as Dependable are called Opportunity sales and can be sourced from non-dependable resources or uncommitted dependable resources: - Opportunity (Bilateral) Sales negotiated with a purchasing party and documented by contract or recorded exchange. The duration of delivery for these sales generally does not exceed months, and can be as short as one-hour. Opportunity Bilateral sales can include the sale of capacity and/or energy.

13 Tab Page of January, Opportunity (Day Ahead or Real Time Markets) Export sales transactions in a market operated by an independent system operator for the purchase and sale of power related products for the next operating day ( Day Ahead ) or during the operating day ( Real Time ). Merchant transactions represent arbitrage opportunities and are unrelated to Manitoba Hydro generation. These include physical purchases of power from one market for re-sale to another market. Other Sales include miscellaneous revenues derived from market activities such as the sale of ancillary services into the Midcontinent Independent System Operator ( MISO ) market and congestion management with the Ontario market. Transmission Credits refer to revenues received for the use of Manitoba Hydro s transmission system. Manitoba Hydro Open Access Transmission Tariff defines the fees for use of its transmission system. The MISO administers collection of these fees on behalf of Manitoba Hydro, which is why they are reported as US revenues. Renewable Energy Certificates are revenues received mainly from the sale of environmental attributes acquired by Manitoba Hydro through power purchase agreements with wind generation suppliers in Manitoba. The following sections highlight the year over year changes from 0/ through 0/: 0/ Actual vs. 0/ Actual The 0/ increase reflects higher US sales volumes largely made possible by increased generation from stations on the Nelson River due to higher flows. Hydraulic generation was also higher in 0/ because the Wuskwatim Generating Station was in service for the entire year. Export revenues were also favourably impacted by an increase in merchant sales, higher market prices, and favourable foreign exchange rates on revenues from US sales. 0/ Forecast vs. 0/ Actual The 0/ forecast decrease reflects lower US sales volumes largely due to transmission outages that restricted exports on the US transmission line during October and November 0. Merchant sales are projected to be lower as Manitoba Hydro does

14 Tab Page of January, 0 0 not expect to have the same level of arbitrage opportunities between markets as was experienced in 0/. These decreases were partially offset by higher foreign exchange rates affecting revenues from US sales. 0/ Forecast vs. 0/ Forecast The 0/ forecasted increase reflects higher export prices and a projected increase in foreign exchange rates on US sales. This increase is partially offset by lower Canadian sales volumes due to reduced participation in the IESO market and an expected decrease in merchant sales projected for 0/ due to reduced arbitrage opportunities between markets. 0/ Forecast vs. 0/ Forecast The 0/ forecasted increase is primarily due to an increase in prices of Dependable and Opportunity Sales. There are also additional firm export contract sales effective in 0/, further increasing the total export revenue compared to 0/. This includes the SaskPower -megawatt sale which is in effect for its first full year in 0/, increasing Canadian sales over 0/.

15 Tab Page of January, OTHER REVENUE Other Revenue includes a variety of different revenue items, with the most significant items being: Joint Use contracts representing the net rental revenue between Manitoba Hydro and MTS, Cable TV and other utilities. Net revenue is the difference between gross revenue (attachments on Manitoba Hydro property) and gross billings (Manitoba Hydro attachments on external party property). Third party revenues where there is a provision of services for the use/rental of Manitoba Hydro owned assets. Revenues received for work the Corporation undertakes on customer owned plant on a fee-for-service basis. Electrical inspections performed by Manitoba Hydro on customer owned facilities. Gains on sale of land to external parties. Gains are calculated as the sale price less historical acquisition costs and costs of disposal. Miscellaneous Other Income which includes income items such as litigation settlements, apprenticeship tax credits, etc. Figure. Other Revenue

16 Tab Page of January, 0 MANITOBA HYDRO Schedule.. OTHER REVENUE (000's) 0/ 0/ 0/ 0/ 0/ Actual Actual Forecast Forecast Forecast 0 0 Other Revenue $ $ $ $ 0 $ $ Change $ ( 0) $ ( ) $ ( ) $ % Change -.% -0.0% -.% 0.% The following sections highlight the year over year changes from 0/ through 0/: 0/ Actual vs. 0/ Actual The 0/ decrease is primarily due to a reduction in gains on sale of land compared to 0/ as well as a reduction goods and services sold to outside parties compared to 0/. 0/ Forecast vs. 0/ Actual The 0/ forecast decrease is partially due to gains on sale of land that occurred in 0/ and are not expected in 0/. In addition, there is a reduction in the amount forecast for third party work on customer owned assets. 0/ Forecast vs. 0/ Forecast No significant change. 0/ Forecast vs. 0/ Forecast No significant change.

17 Tab Page of January, 0 0. OPERATING, MAINTENANCE & ADMINISTRATIVE Operating, Maintenance & Administrative (OM&A) Expenses are comprised primarily of labour and benefits, materials, contracted services, and overhead costs associated with operating and maintaining all facilities of the Corporation and providing services to customers. Figure. provides a summary of OM&A expenses indicating the impact of accounting estimate and policy changes between 0/ and 0/, which are represented in yellow. Figure. Operating, Maintenance & Administrative OM&A Accounting Estimate & Policy Changes / 0/ 0/ 0/ 0/

18 Tab Page of January, 0 The following table provides a breakdown of the OM&A expenses incorporating accounting changes: MANITOBA HYDRO Schedule.. OPERATING, MAINTENANCE AND ADMINISTRATIVE COSTS (000's) (In thousands of $) 0/ 0/ 0/ 0/ 0/ Average Annual Actual Actual Forecast Forecast Forecast % Inc/(Dec) Wages & Salaries $ $ 0 $ 0.% Overtime % Employee Benefits % Sub-Total Less: Labour & Benefits Charged to Capital ( ) ( 0) ( ) ( ) ( ).% Labour & Benefits Charged to Operations* % Other Costs Employee Safety & Training.% Travel Expenses 0.% Motor Vehicle 0 0.% Materials & Tools % Consulting & Professional Fees 0.% Construction & Maintenance Services 0 0.% Building & Property Services.% Equipment Maintenance & Rentals % Consumer Services 00.% Computer Services 00 0.% Collection Costs % Customer & Public Relations 0 -.% Sponsored Memberships.% Office & Administration.% Communication Systems.% Research & Development Costs -.% Miscellaneous Expense % Contingency Planning Operating Expense Recovery ( ) ( 0) ( ) ( ) ( ) 0.0% Strategic Initiative Funding 0 0 Sub-Total 0 00 Less: Other Costs Charged to Capital ( ) ( 0) ( ) ( ) ( ).% Other Costs Charged to Operations*.0% Total % Less: Capitalized Overhead ( 0) ( ) ( ) ( ) ( ) -.% Operating and Administration Charged to Centra ( ) ( 0) ( ) ( ) ( ).% Electric OM&A, including Accounting Changes 0 0.% Less: Accounting Changes ( ) ( ) ( ) ( ) ( ) Electric OM&A, excluding Accounting Changes $ 0 $ $ $ 0 $ % Year over Year % Change, including Accounting Changes.%.0%.%.%.% Year over Year % Change, excluding Accounting Changes.% 0.%.%.%.0% *Includes amounts capitalized through Overhead The.% average annual growth over the year period is primarily a result of accounting changes. These changes include an increase in pension and benefit costs

19 Tab Page of January, under CGAAP due to changes in the assumptions used to calculate these costs, such as changes in the discount rate and mortality tables. IFRS changes commence in 0/ and primarily impact capitalized overhead costs, which are no longer eligible for capitalization. While accounting changes under both CGAAP and IFRS have impacted OM&A costs, this is fully offset by reductions to depreciation and amortization expense. Please see Appendix. for more detailed information on the net impact of accounting changes in IFF. The average annual growth rate, excluding accounting changes, is.0%. The growth of.0% reflects higher wages and salaries due to contract settlements, merit and progression of approximately % to % annually, which is mainly offset by a concerted effort by Manitoba Hydro on cost containment, as further discussed in Section.. The cost containment strategy focuses on a comprehensive management of staff positions across all Business Units. The corporation continues to review work processes and functions to identify opportunities for the elimination of work no longer deemed essential, to consolidate similar functions where overlap may exist, and to implement changes which reduce costs and increase efficiencies. This review has resulted in a projected reduction of 00 operational EFTs which is discussed further in Appendix.. The following sections highlight the year over year changes from 0/ through 0/: 0/ Actual vs. 0/ Actual The 0/ increase is primarily a result of accounting changes causing higher pension and benefit costs driven by changes in estimates for the discount rate and mortality rates. 0/ Forecast vs. 0/ Actual The 0/ forecast increase is a result of contract wage settlements, which is mainly offset by the Corporation s cost containment initiatives. 0/ Forecast vs. 0/ Forecast The 0/ forecast increase is primarily attributable to IFRS accounting changes resulting in the requirement to expense $ million of costs no longer eligible for capitalization. Excluding accounting changes, the forecasted increase in 0/ of.% is a result of contract wage settlements, which is mainly offset by the Corporation s cost containment initiatives.

20 Tab Page of January, 0 0 0/ Forecast vs. 0/ Forecast The 0/ forecast increase is primarily attributable to higher pension costs due to an increase in interest on the obligation and higher pensionable earnings. Excluding accounting changes, the forecasted increase in 0/ of.% is the result of expected escalation in wages and salaries, mainly offset by the Corporation s cost containment initiatives. Appendix. provides additional comprehensive information on Equivalent Full Time positions ( EFTs ), OM&A costs by category and Business Unit.

21 Tab Page of January, 0 0. FINANCE EXPENSE Finance expense consists of costs associated with the Corporation s financing activities. The largest component of finance expense is gross interest expense on the Corporation s debt portfolio. Finance expense is also affected or partially offset by a number of other components including: the debt guarantee fee; the amortization of discounts, premiums & transaction costs; the income or gains associated with the sinking fund and foreign exchange; and interest capitalized for capital projects under construction. Figure. Finance Expense Finance Expense (in millions of $) $00.0 $00.0 $00.0 $00.0 $00.0 $00.0 $- 0/ Actual 0/ Actual 0/ Forecast 0/ Forecast 0/ Forecast

22 Tab Page 0 of January, 0 The following schedule provides for a breakdown of Finance Expense. MANITOBA HYDRO Schedule.. FINANCE EXPENSE (000's) 0/ 0/ 0/ 0/ 0/ Actual Actual Forecast Forecast Forecast Interest on Short & Long-Term Debt Gross Interest $, $,0 $, $, $, Provincial Guarantee Fee 0,, 0,0,0,0 Amortization of (Premiums), Discounts, and Transaction Costs,,,, Intercompany Interest Receivable (,) (,) (,0) (,0) (,) Total Interest on Short & Long Term Debt, 0, 0,, 0, Interest Allocated to Construction (,0) (,) (,) (0,0) (,) Interest Earned on Sinking Fund (,) (,) () (,) (,0) Realized Foreign Exchange (Gains) or Losses on Debt in Cash Flow Hedges,0 (,) (0,) (,0) (0,) Revaluation of Dual Currency Bonds,,,0,0 Corporate Allocation (,) (,) (,) (,) (,) Other Amortization,,0,,, Total Finance Expense $, $,0 $, $ 0, $, 0 Year over year $ change $ (,) $,0 $, $,0 Year over year % change -.%.%.%.% Manitoba Hydro is forecasting that in the next 0 years it will be necessary to fund the vast majority of its capital expenditures through debt financing. When combined with debt refinancing requirements, the total debt requirements for Manitoba Hydro s electric operations in the next five-year period will peak at levels in excess of $ billion per year. These total forecast debt financing requirements are unprecedented in Manitoba Hydro s history. For finance expense, the total interest on short & long term debt is shown as the green line on the following figure: Figure. Total Interest on Short-term & Long-term Debt $,00.0 Finance Expense (in millions of $) $,00.0 $,00.0 $,00.0 $,00.0 Total Interest on Short & Long Term Debt $,000.0 $00.0 $00.0 $00.0 $00.0 $00.0 $00.0 $00.0 $00.0 $00.0 $- 00/0 Actual 00/0 Actual 0/ Actual 0/ Actual 0/ Actual 0/ Actual 0/ Forecast 0/ Forecast 0/ Forecast 0/ Forecast 0/ Forecast 0/0 Forecast 00/ Forecast 0/ Forecast 0/ Forecast 0/ Forecast

23 Tab Page of January, The components within this category are as follows: Gross Interest is the interest paid on Canadian and US dollar debt. The Provincial Guarantee Fee (PGF) is an annual fee payable to the Province of Manitoba in exchange for the guarantee of the Corporation s debt (with the exception of Manitoba Hydro-Electric Board Bonds) and is calculated using a rate of % multiplied by the applicable outstanding debt at March st of the previous fiscal year. The Amortization of Premiums, Discounts and Transaction Costs, arising from actual debt issuance on the existing debt portfolio are amortized over the term of the debt. The Intercompany Interest Receivable is primarily from the interest received from Manitoba Hydro s subsidiary, Centra Gas Manitoba Inc. ( Centra ), on the short and long term debt advances made to Centra from Manitoba Hydro. Interest rates for advances to Centra are based on the associated cost of financing that was incurred by Manitoba Hydro. The actual and forecasted level of total interest on short & long term debt generally follows the growth in the size of the total debt portfolio financing the expansion of the Corporation s net capital assets. Commencing with 0/, the gross interest and PGF levels will begin to rise sharply in accordance with the escalation in capital financing, until 0/ when the overall levels flatten as capital investments subside. The Interest Allocated to Construction is the interest capitalized during the construction of a project, which is a reduction to finance expense and a charge to the capital project. The interest associated with a capital project is not included in finance expense until the project is placed into service. As shown in the following figure, the interest allocated to construction (lightly shaded blue bars) is the primary factor that reduces the level of total interest on short & long term debt (green line) to arrive at net finance expense (dark blue bars) on the financial statements.

24 Tab Page of January, 0 Figure. Finance Expense and Interest Allocated to Construction $,00.0 Finance Expense (in millions of $) $,00.0 $,00.0 $,00.0 $,00.0 Interest Allocated to Construction Finance Expense Total Interest on Short & Long Term Debt $,000.0 $00.0 $00.0 $00.0 $00.0 $00.0 $00.0 $00.0 $00.0 $ $- 00/0 Actual 00/0 Actual 0/ Actual 0/ Actual 0/ Actual 0/ Actual 0/ Forecast 0/ Forecast Consequently, during periods of intensive capital construction, the net finance expense, and hence the revenue requirement, is temporarily shielded from the full weight of the gross finance expense by the interest allocated to construction. By 0/, as the level of capital investments subside, the net finance expense closely approaches the total interest on short and long term debt of over $. billion per year. In addition to the interest allocated to construction, there are a number of other components within finance expense as follows: 0/ Forecast 0/ Forecast 0/ Forecast 0/0 Forecast 00/ Forecast 0/ Forecast 0/ Forecast 0/ Forecast The Interest Earned on Sinking Fund is primarily the interest recognized on Canadian and US sinking fund investments/ cash. The Realized Foreign Exchange (Gains) or Losses on Debt in Cash Flow Hedges, arising from the difference between the historic and market exchange rates on US dollar debt, are recorded in Finance Expense when hedged export revenues are realized. The Revaluation of Dual Currency Bonds is primarily a measure of the quarterly change in present value of the USD interest payments as translated into Canadian currency at the exchange rate prevailing at the balance sheet date. The Corporate Allocation amount includes the interest on the Centra acquisition debt and the related Provincial Guarantee Fee. This amount is included in the

25 Tab Page of January, 0 0 Corporate Allocation in Section.. Other Amortization is primarily the amortization of the Winnipeg Hydro obligation and First Nations settlements. While the forecasted increases in net finance expense primarily arise as capital assets go in-service and net finance expense is no longer reduced by the associated interest allocated to construction, gross interest expense arising from debt obligations will be affected by changing interest rates for new and refinanced debt requirements, as well as the debt portfolio s floating rate debt. Changing interest rates will also have a counterbalancing impact upon the interest capitalization rate used to derive the interest allocated to construction. The low interest rate environment over the past few years has provided the opportunity for Manitoba Hydro to secure stable, low cost funding such that the weighted average interest rate on the debt portfolio has decreased. As shown on the following figure, since 00/0, the debt portfolio s net weighted average interest rate has decreased by nearly.0%. It is anticipated that this positive trend will continue until leveling off in 0/. Figure. Weighted Average Interest Rate Weighted Average Interest Rate (%) (For the Fiscal Year Ended March ) Actual 00/0 Actual 00-0 Actual 00-0 Actual 00- Actual 0- Actual 0- Actual 0- Actual Forecast Forecast Forecast Although economic forecasts during the last few years have generally called for a quicker economic recovery and correspondingly higher interest rates, on an actual basis, the strength and pace of a recovery has been subdued. Manitoba Hydro will continue to

26 Tab Page of January, monitor the financial markets, along with gathering the views of external economic forecasters in order to obtain the range and consensus forecast of their opinions. The adverse interest rate risk associated with rising interest rates can be minimized through a series of actions such as: a) reducing the level of variable (or floating) rate debt within the debt portfolio; b) taking advantage of the historically low interest rate environment for long bonds by securing long term fixed rate financing as required; and c) enhancing the stability of the debt portfolio by extending the weighted average term to maturity. See the Debt Management Strategy in Appendix. for additional information regarding the Corporation s debt financing requirements and strategies. It is also important to recognize that changes in the interest rate environment arising from macro-economic conditions may affect other aspects of Manitoba Hydro s operations and financial performance. For example, low interest rates may be correlated with low extraprovincial energy prices. From a liquidity risk perspective, the significant differential between the Corporation s interest cash flow obligations (approximated by the green total interest on short & long term debt) and the accounting net finance expense contribution to revenue requirement (dark blue bars) will place addition pressure upon the Corporation s cash flow and interest coverage ratios. In order to mitigate the foreign currency exchange risk on export revenues denominated in United States dollars (USD), Manitoba Hydro maintains a natural hedge with USD cash flows, including finance expense cash flows from US denominated debt. For example, to the extent that the underlying USD inflows and outflows are in balance, while a strengthening US dollar will increase the translation of US export revenues into Canadian dollars (CAD), this change will be offset by increases in the translation of US dollar expenses (such as US dollar interest expense) into CAD.

27 Tab Page of January, 0 0 The following sections highlight the year-over-year changes from 0/ through 0/: 0/ Actual vs. 0/ Actual The decrease was primarily due to lower interest rates, higher realized foreign exchange gains on U.S. debt and higher recognized gains on the sale of U.S. sinking fund investments. This was partially offset by higher volumes of long term debt to finance capital expenditures and a weaker Canadian dollar. 0/ Forecast vs. 0/ Actual; 0/ Forecast vs. 0/ Forecast; and 0/ Forecast vs. 0/ Forecast Gross interest expense increases during the forecast years, primarily due to new long term debt issued in finance the Corporation s capital investments as well as interest rates that are projected to rise to more normalized levels by the final forecast year. As a partial offset, any interest associated with funding capital projects under construction is capitalized, thereby reducing total finance expense.

28 Tab Page of January, 0 0. DEPRECIATION & AMORTIZATION Depreciation and Amortization expenses are calculated using a straight line remaining life basis. The asset categories include: Generation, Transmission, Distribution, and Other (General Equipment, Communication Equipment, Buildings, and Vehicles). Also included is the amortization of non-refundable customer contributions, regulated assets and intangible assets. Figure.0 below shows the lower depreciation and amortization expense reflecting the change in estimate as a result of adjustments in asset service lives, removal of negative salvage from depreciation rates and the impact of the change in depreciation methodology. Figure.0 Depreciation & Amortization 0

29 Tab Page of January, 0 Please see the following schedule for a breakdown of Depreciation and Amortization. MANITOBA HYDRO Schedule.. DEPRECIATION AND AMORTIZATION EXPENSE (000's) 0/ 0/ 0/ 0/ 0/ Actual Actual Forecast Forecast Forecast Generation Hydraulic Generating Stations Thermal Generating Stations 0 Demand Side Management 0 0 Diesel Generating Stations Wuskwatim 0 Amortization of Contributions () () ( 0) ( ) ( ) $ 0 $ 0 $ $ $ Transmission Transmission Amortization of Contributions ( ) ( 0) ( 0) ( 0) ( 0) $ $ 0 $ $ 0 $ 0 Stations Substations 0 Transformers 0 0 Amortization of Contributions ( ) ( ) ( 0) ( 0) ( 0) $ 0 $ 0 $ $ 0 $ 0 Distribution Subtransmission Lines 0 Distribution Lines Meters & Transformers 0 0 Amortization of Contributions ( 0) ( ) ( ) ( 0) ( 00) $ 0 $ 0 $ 0 $ 0 0 $ Other Communications 0 0 Motor Vehicles 0 0 Structures & Improvements 0 00 General Equipment 0 0 Computer Development 0 0 Conawapa Affordable Energy Fund Miscellaneous 0 0 Corporate Allocation ( ) ( ) ( ) ( 0) ( ) Target Adjustment - - () ( 0) ( ) $ $ 0 0 $ $ $ 00 Total D&A Expense Including Accounting Changes $ $ 0 $ 0 0 $ 00 $ 0 Add: Accounting Policy & Estimate Changes - - Total D&A Expense Excluding Accounting Changes $ $ 0 $ $ $ Year over year % change Including Accounting Changes.% -.% -0.%.% Year over year % change Excluding Accounting Changes.%.%.%.%

30 Tab Page of January, The following sections highlight the year over year changes from 0/ through 0/: 0/ Actual vs. 0/ Actual The 0/ increase is primarily due to new additions to plant and equipment coming into service, including the Wuskwatim Generating Station which was fully in-service during the 0/ fiscal year. 0/ Forecast vs. 0/ Actual Fiscal 0/ reflects an increase in depreciation expense as a result of $. billion in assets going into service. Of the $. billion in additions, approximately $.0 billion is comprised of new generation and transmission projects including the Pointe du Bois Spillway Replacement ($ million), the Riel 0/00 KV Station ($ million), and Bipole III Converter Station ($ million), with $ million comprised of sustaining capital investments. The increase in depreciation expense as a result of plant additions is more than offset by the impact of new depreciation rates implemented by Manitoba Hydro. The new depreciation rates were determined as part of Manitoba Hydro s most recent depreciation study and reflect new service life estimates effective April, 0. Please see Appendix. for a discussion of the depreciation study and the associated depreciation rates and for correspondence from Gannett Fleming, Inc. setting out the depreciation rates to be used under GAAP and IFRS. 0/ Forecast vs. 0/ Forecast Similar to the results reflected in the 0/ forecast, depreciation continues to increase as result of $ million in plant assets going into service in the 0/ fiscal period. The majority of the assets forecast to go into service are comprised of sustaining capital investments of $ million. Overall depreciation decreases as a result of changes implemented by Manitoba Hydro in order to comply with the financial reporting requirements of IFRS. These changes include the removal of the provision for asset retirement costs from depreciation rates, the removal of administrative overhead from inclusion in the cost of capital projects, and the change in method of depreciation. The removal of the provision for asset retirement

31 Tab Page of January, 0 0 costs and the removal of administrative overhead from the cost of capital projects resulted in a decrease in depreciation expense totaling $0 million that was partially offset by a $ million increase caused by the change in method of depreciation. 0/ Forecast vs. 0/ Forecast The $ million increase forecasted in 0/ is the result of $0. billion of assets going into service in fiscal 0/ (comprised of $ million in sustaining capital investments), as well as the projected commencement of the amortization of deferred Conawapa project costs. For purposes of MH, it is assumed that the deferred Conawapa costs are treated as a rate-regulated asset beginning in 0/.

32 Tab Page 0 of January, 0 0. WATER RENTALS & ASSESSMENTS Pursuant to The Water Power Act, water rentals are paid to the Province for the use of water resources for hydroelectric generation. Assessments include amounts paid for water usage pursuant to The Water Rights Act, Lake of the Woods Control Board and Lac Seul Operating Costs, National Energy Board (NEB) assessments, and membership fees for MISO and other industry associations. Land rentals are annual payments for the use of Manitoba Crown lands used for water power purposes, as set out in Manitoba Hydro s Water Power Act licenses. Figure. Water Rentals & Assessments

33 Tab Page of January, 0 Please see the following schedule for a breakdown of Water Rentals and Assessments. MANITOBA HYDRO Schedule.. WATER RENTALS AND ASSESSMENTS (000's) 0/ 0/ 0/ 0/ 0/ Actual Actual Forecast Forecast Forecast Water Rentals $ 0 0 $ 0 $ $ 0 $ 0 0 Assessments & Land Rentals 0 0 Total Water Rentals and Assessments $ $ $ $ $ 0 0 Year over year $ change $ $ ( 0) $ ( ) $ (0 0) Year over year % change.% -0.% -.% -.% The following sections highlight the year over year changes from 0/ through 0/: 0/ Actual vs. 0/ Actual The 0/ increase is primarily due to increased water rentals due to an increase in hydraulic generation along the Nelson River as a result of higher system inflows compared to 0/. Also, the Wuskwatim Generating Station was in service for the entire year which contributed to the increase in the total water rental cost for 0/. 0/ Forecast vs. 0/ Actual The 0/ forecast decrease reflects lower hydraulic generation largely due to transmission outages that restricted exports on the US transmission line during October and November 0. 0/ Forecast vs. 0/ Forecast The 0/ forecast decrease reflects lower hydraulic generation due to assumed median inflow conditions as compared to above average inflow conditions that occurred in 0/. Although lower than 0/, hydraulic generation is still expected to be above average due to significant carry over storage from 0/. The decrease in water rentals is expected to be partially offset by higher membership fees and assessments due to an increase in NEB charges.

34 Tab Page of January, 0 0/ Forecast vs. 0/ Forecast The 0/ forecast decrease reflects lower water rentals due to lower hydraulic generation based on the assumption of average historic water flow conditions. Hydraulic generation, and therefore water rentals, is expected to be higher in 0/ primarily because of carry forward storage from the prior year.

35 Tab Page of January, 0 0. FUEL & POWER PURCHASED Fuel & Power Purchased includes costs of fuel for thermal generation facilities, costs for purchased energy, and other miscellaneous costs associated with export and import market activities and system operation. In 0/, over % of electricity forecast to be generated by Manitoba Hydro is from its hydraulic generating stations and less than % from its two thermal generation stations and four remote diesel generation facilities. In addition, Manitoba Hydro purchases wind power from the independently-owned St. Leon and St. Joseph wind farms. Manitoba Hydro also imports electricity depending on the operating and economic circumstances. Figure. Fuel & Power Purchased

36 Tab Page of January, 0 Please see the following schedule for a breakdown of Fuel & Power Purchased. MANITOBA HYDRO Schedule.. FUEL AND POWER PURCHASED (000's) 0/ 0/ 0/ 0/ 0/ Actual Actual Forecast Forecast Forecast Thermal Fuel Coal $ 0 $ $ $ 0 $ Natural Gas & Other 0 0 Power Purchased Merchant Purchases Transmission Charges 0 0 Total Fuel and Power Purchased $ $ $ $ 0 $ Year over year $ change $ $ ( ) $ ( ) $ 0 0 Year over year % change.% -.% -.%.% Please see the following for a description of Fuel & Power Purchased components: Coal purchases refers to the charge for coal consumed as the principal fuel for Brandon Unit for the purpose of generating electricity under restricted operations. Natural Gas & Other includes natural gas, oil and diesel requirements for Brandon and Selkirk, and diesel for remote locations for the purpose of generating electricity. Power Purchased includes purchases of electrical energy from wind farms in Manitoba as well as from external Canadian and US suppliers. Merchant purchases represent arbitrage opportunities and are unrelated to Manitoba Hydro generation. These include physical purchases of power from one market for re-sale to another market. Transmission Charges relate primarily to reservation fees for use of transmission facilities for imports or exports, or for merchant transactions.

37 Tab Page of January, The following sections highlight the year over year changes from 0/ through 0/: 0/ Actual vs. 0/ Actual The 0/ increase was primarily the result of higher purchased volumes due to colder weather during the winter of 0/. Merchant purchases were also higher in 0/ due to increased arbitrage opportunities between markets. 0/ Forecast vs. 0/ Actual The 0/ forecast decrease is primarily the result of lower purchased volumes due to the assumption of normal weather and a year-over-year projected increase in hydraulic generation during the winter period. Merchant purchases are also projected to be lower in 0/ as Manitoba Hydro does not expect to have the same level of arbitrage opportunities between markets as was experienced in 0/. Transmission charges are also projected to be lower largely because of 00 MW of transmission service expiring in the third quarter of 0/. 0/ Forecast vs. 0/ Forecast The 0/ forecast decrease is the result of reduced merchant purchases due to less arbitrage opportunities forecast for 0/. Transmission charges are also reduced because of a 00 MW transmission service that expired towards the end of 0/, with the effect being fully realized in 0/. These reductions are partially offset by an increase in off-peak imports as a consequence of reduced hydraulic generation. 0/ Forecast vs. 0/ Forecast The 0/ forecast increase is primarily due to increases in the volumes of US off-peak purchases and increased thermal costs. These increases are largely because the 0/ forecast reflects average purchases and costs based on the full range of historic flows with consideration for drought included, whereas 0/ is based on hydraulic generation from median inflows coupled with above average carry forward storage from 0/. Transmission charges are projected to increase due to 00 MW of new transmission service as of November, 0.

38 Tab Page of January, 0.0 CAPITAL & OTHER TAXES Capital and Other Taxes is comprised of payments made to the Province of Manitoba for capital and payroll taxes as well as grants in lieu of taxes ( grants in lieu ), and business and property taxes paid to the various municipalities in Manitoba. Figure. Capital & Other Taxes 0 The following schedule provides a breakdown of Capital and Other Taxes. MANITOBA HYDRO Schedule.. CAPITAL AND OTHER TAXES (000's) 0/ 0/ 0/ 0/ 0/ Actual Actual Forecast Forecast Forecast Capital Tax $ $ 0 $ 0 $ 0 0 $ Grants in Lieu of Taxes 0 Payroll Tax 0 0 Business & Property Tax Other Municipal Payments 00 0 GST Reassessment on City Tax Total Capital & Other Taxes $ $ 0 $ 0 $ 0 $ 0 Year over year $ change $ 0 $ 0 $ $ Year over year % change.0%.%.%.%

39 Tab Page of January, The following provides a description of Capital & Other Tax components: The Corporation pays capital tax to the Province of Manitoba at a rate of 0.% and is applied to the taxable capital of the company. The Corporation pays grants in lieu on its land and buildings. The amount of grants in lieu paid is determined based on property valuations and municipal and school division mill rates, similar to the manner in which property taxes are determined for other tax payers in Manitoba. Payroll tax is based on a tax rate of.% which is applied to the Corporation s gross payroll. A portion of the payroll taxes paid is allocated to Centra based on the relative percentage of activity charges to gas programs. Business taxes are paid with respect to commercial space occupied by the company in both leased and owned properties. The Corporation pays property taxes to the landlords of leased premises as part of the required lease payments. The Corporation also makes other municipal payments with respect to the town of Gillam and the Frontier School Division. The Canada Revenue Agency ( CRA ) performed an audit with respect to an issue regarding GST being charged to customers. It was determined that the GST should be applied to the City of Winnipeg tax charged to customers. In 0/ the Corporation was assessed, and accrued for, past taxes not collected from customers in the amount of $. million. The following sections highlight the year over year changes from 0/ through 0/: 0/ Actual vs. 0/ Actual The 0/ increase is higher than expected partially due to the inclusion of the $. million Canada Revenue Agency GST audit reassessment. The remainder of the increase is largely driven by the increase in provincial capital tax which is linked to increasing debt levels to fund capital investments. Other municipal payments have also increased at

40 Tab Page of January, 0 0 a rate higher than inflation due to increased funding requirements relating to the town of Gillam. 0/ Forecast vs. 0/ Actual The forecast 0/ increase is primarily due to higher capital taxes. Going forward, all years will be impacted by capital taxes increasing at greater than the rate of inflation due to higher capital investment increasing debt levels. Other municipal payments relating to the town of Gillam also continue to increase due to operational funding needs. 0/ Forecast vs. 0/ Forecast Capital tax is higher due to increased capital spending for Keeyask, Bipole III and aging infrastructure. All other items are forecast to generally increase in line with inflation. 0/ Forecast vs. 0/ Forecast Capital tax is higher due to increased capital spending for Keeyask, Bipole III and aging infrastructure. All other items are forecast to generally increase in line with inflation.